Chapter
4
THE ACCOUNTING
CYCLE:
Accruals and Deferrals
Presented by:
Endra M. Sagoro
Economic Faculty YSU
endra_ms@uny.ac.id
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
At the end of the
period, we need to
make adjusting entries
to get the accounts up
to date for the financial
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Adjusting Entries
Adjusting
entries are
needed whenever
revenue or expenses
affect more than one
accounting
period.
McGraw-Hill/Irwin
Every
adjusting
entry involves a
change in either a
revenue or expense
and an asset
or liability.
© The McGraw-Hill Companies, Inc., 2002
Types of Adjusting Entries
 Converting
assets to
expenses
 Converting
liabilities to
revenue
 Accruing
unpaid
expenses
 Accruing
uncollected
revenues
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Assets
Expenses
End ofto
Current
Period
Prior Periods
Transaction
Paid future
expenses in
advance
(creates an
asset).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting Entry
 Recognize portion
of asset consumed
as expense, and
 Reduce balance of
asset account.
© The McGraw-Hill Companies, Inc., 2002
Converting Assets to Expenses
Examples Include:
Depreciation
Supplies
Expiring Insurance Policies
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Assets to Expenses
$2,400 Insurance Policy
Coverage for 12 Months
$200 Monthly Insurance Expense
Jan. 1
Dec. 31
On January 1, Webb Co. purchased a oneyear insurance policy for $2,400.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Assets to Expenses
Initially, costs that benefit more than one
accounting period are recorded as assets.
GENERAL JOURNAL
Date
Jan.
Account Titles and Explanation
1 Unexpired Insurance
Cash
Debit
Credit
2,400
2,400
Purchase a one-year insurance policy.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Assets to Expenses
The costs are expensed as they are used to
generate revenue.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense
Unexpired Insurance
200
200
Insurance expense for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Assets to Expenses
Balance Sheet
Income Statement
Cost of assets
that benefit
future periods.
Cost of assets
used this period to
generate revenue.
Unexpired Insurance
1/1 2,400 1/31
200
Bal. 2,200
McGraw-Hill/Irwin
Insurance Expense
1/31
200
© The McGraw-Hill Companies, Inc., 2002
The
Concept
of
Depreciation
Depreciable assets are physical objects
that retain their size and shape but lose
their economic usefulness over time.
Depreciation is the systematic allocation of
the cost of a depreciable asset to expense.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
The
Concept
of
Depreciation
The portion of an asset’s utility that is used
up must be expensed in the period used.
Fixed
Asset
(debit)
On date
when initial
payment is
made . . .
Cash
(credit)
McGraw-Hill/Irwin
The asset’s
usefulness is
partially
consumed
during the
period.
Accumulated
Depreciation
(credit)
At end of
period . . .
Depreciation
Expense
(debit)
© The McGraw-Hill Companies, Inc., 2002
Depreciation
Is
Only
an
Estimate
On May 2, 2003, JJ’s Lawn Care Service purchased a
lawn mower with a useful life of 50 months for
$2,500 cash.
Using the straight-line method, calculate the monthly
depreciation expense.
Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)
$50 = $2,500
McGraw-Hill/Irwin
50
© The McGraw-Hill Companies, Inc., 2002
Depreciation Is Only an Estimate
JJ’s Lawn Care Service would make the
following adjusting entry.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
May 31 Depreciation Expense: Tools & Eq.
Credit
50
Accumulated Depreciation: Tools & Eq.
50
To record one month's depreciation.
Contra-asset
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Depreciation Is Only an Estimate
JJ’s $15,000 truck is depreciated over 60
months as follows:
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Depreciation Expense: Truck
Accumulated Depreciation: Truck
Debit
Credit
250
250
To record one month's depreciation.
$15,00060 months = $250 per
month
© The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
JJ's Lawn Care Service
Partial Balance Sheet
Accumulated depreciation
May 31, 2001 would
appear on the balance
Assets sheet as
Cash
$ 3,925
follows:
Accounts receivable
75
Tools & equipment $ 2,650
Less: Accum. depr.
50
2,600
Truck
$ 15,000
O
Less: Accum. depr.
250 14,750
T
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities
to Revenue
End of Current
Period
Prior Periods
Transaction
Collected
from
customers in
advance
(creates a
liability).
McGraw-Hill/Irwin
Current Period
Future Periods
Adjusting Entry
 Recognize portion
earned as revenue,
and
 Reduce balance of
liability account.
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities to Revenue
Examples Include:
Airline Ticket Sales
Sports Teams’ Sales of
Season Tickets
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities to Revenue
$6,000 Rental Contract
Coverage for 12 Months
$500 Monthly Rental Revenue
Jan. 1
Dec. 31
On January 1, Webb Co. received $6,000 in
advance for a one-year rental contract.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities to Revenue
Initially, revenues that benefit more than one
accounting period are recorded as liabilities.
GENERAL JOURNAL
Date
Jan.
Account Titles and Explanation
1 Cash
Unearned Rental Revenue
Debit
Credit
6,000
6,000
Collected $6,000 in advance for rent.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities to Revenue
Over time, the revenue is recognized as it is
earned.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Monthly Adjusting Entry for Rent Revenue
Jan. 31 Unearned Rental Revenue
Rental Revenue
500
500
Rental revenue for January.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Converting Liabilities to Revenue
Balance Sheet
Income Statement
Liability for
future periods.
Revenue earned
this period.
Unearned Rental Revenue
1/31
500
McGraw-Hill/Irwin
1/1 6,000
Bal. 5,500
Rental Revenue
1/31
500
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid
End Expenses
of Current Period
Prior Periods
Current Period
Adjusting Entry
 Recognize expense
incurred, and
 Record liability for
future payment.
McGraw-Hill/Irwin
Future Periods
Transaction
Liability will
be paid.
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
Hey, when do
we get paid?
Examples Include:
Interest
Wages and Salaries
Property Taxes
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
$3,000 Wages
Expense
Monday,
May 29
Wednesday,
May 31
Friday,
June 2
On May 31, Webb Co. owes wages of $3,000.
Pay day is Friday, June 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
Initially, an expense and a liability are
recorded.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Wages Expense
Wages Payable
Debit
Credit
3,000
3,000
To accrue wages owed to employees.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
Balance Sheet
Income Statement
Liability to be
paid in a future
period.
Cost incurred this
period to generate
revenue.
Wages Payable
5/31 3,000
McGraw-Hill/Irwin
Wages Expense
5/31 3,000
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
$5,000 Weekly Wages
$3,000 Wages
Expense
Monday,
May 29
$2,000 Wages
Expense
Wednesday,
May 31
Friday,
June 2
Let’s look at the entry for June 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Unpaid Expenses
The liability is extinguished when the debt is
paid.
GENERAL JOURNAL
Date
Account Titles and Explanation
June 2 Wages Expense (for June)
Wages Payable (accrued in May)
Cash
Debit
Credit
2,000
3,000
5,000
Weekly payroll for May 29-June 2.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected
Revenue
End of Current
Period
Prior Periods
Current Period
Adjusting Entry
Recognize revenue
earned but not yet
recorded, and
Record receivable.
McGraw-Hill/Irwin
Future Periods
Transaction
Receivable
will be
collected.
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
Examples Include:
Interest Earned
Work Completed But Not
Yet Billed to Customer
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
$170 Interest
Revenue
Saturday,
Jan. 15
Monday,
Jan. 31
Tuesday,
Feb. 15
On Jan. 31, the bank owes Webb Co.
interest of $170. Interest is paid on the 15th
day of each month.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
Initially, the revenue is recognized and a
receivable is created.
GENERAL JOURNAL
Date
Account Titles and Explanation
Jan. 31 Interest Receivable
Interest Revenue
Debit
Credit
170
170
To recognize interest revenue.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
Balance Sheet
Receivable to
be collected in a
future period.
Interest Receivable
1/31
170
McGraw-Hill/Irwin
Income Statement
Revenue earned
this period.
Interest Revenue
1/31
170
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
$320 Monthly Interest
$170 Interest
Revenue
Saturday,
Jan. 15
$150 Interest
Revenue
Monday,
Jan. 31
Tuesday,
Feb. 15
Let’s look at the entry for February 15.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Uncollected Revenue
The receivable is collected in a future period.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Feb. 15 Cash
Credit
320
Interest Revenue (for February)
150
Interest Receivable (accrued Jan. 31)
170
To record interest received.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Accruing Income Taxes Expense: The Final
Adjusting Entry
As a corporation earns taxable income, it
incurs income taxes expense, and also a
liability to governmental tax authorities.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Income Taxes Expense
Income Taxes Payable
Debit
Credit
780
780
Estimated income taxes applicable to
taxable income earned in December.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Adjusting Entries and Accounting Principles
Costs are matched with revenue
in two ways:
 Direct association of costs
with specific revenue
transactions.
 Systematic allocation of costs
over the “useful life” of the
expenditure.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
The Concept of Materiality
An item is “material” if knowledge of the
item might reasonably influence the
decisions of users of financial statements.
Many companies
immediately charge
the cost of
immaterial items to
expense.
Lightbulbs
Supplies
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002
Effects of the Adjusting Entries
Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
Recall from the accounting cycle
discussed in Chapter 3, that after
the adjusting entries are made, an
adjusted trial balance is prepared.
McGraw-Hill/Irwin
Make end-ofyear
adjustments.
Prepare adjusted
trial balance.
© The McGraw-Hill Companies, Inc., 2002
Reference
Williams et al. 2011. Financial and Managerial Accounting: The Basis for
Business Decision 16 ed. New York: McGraw-Hill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2002